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Should The Government Abolish Monopolies And Mergers

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Published: Mon, 5 Dec 2016

Monopoly, is a term used to describe a situation wherein, there is only a single seller for a particular product, it could either be good or service, or both, with not many or no close substitutes for that product.

Derived (from Greek monos / μονος (alone or single) + polein / πωλειν (to sell))

This means that the monopolist enjoys a complete share of the available market.

Government policies with regards to monopolies (e.g., permitting, prohibiting or regulating them) can have adverse effects on the particular company or sector or the entire economy as a whole. Thus, it becomes necessary to understand some key points as to what are the fundamental principles on which monopolies are based, what are the types of monopoly or its classification, how different is Monopoly when compared to Balanced or Perfect price competition, what are the implications of monopoly on society and the economy itself, on what principles does a monopoly function, and is there a need to keep a check on the monopolist.

We would cover each of these points individually, starting with considering the two Absolute conditions. First is a “Pure Monopoly”, here the company has complete control over the supply or sales of a particular product or service with no close substitutes. Second is a “Pure Competition or Perfect Competitive Market”.

Various degrees of Monopoly exist, and rarely is a Monopoly found that could be absolute in true sense. Meaning, a company could still be referred to as a monopoly if,

It faces competition from small scale suppliers of the same or identical products.

A different set of goods produced by separate companies that can act as a substitute to some extent.

A business that produces multiple goods could be referred as a monopoly if it enjoys a large market share for only one or some of its products.

Monopoly, is generally referred to describe when there is not one, but a couple of firms, or few firms producing a particular product or service, which means those few firms control the entire market, as they are a single source of that product.

Natural Monopoly

Natural Monopoly could be defined as a state where in due to the Economies of Scale, the Production costs is lower if there is only one firm producing a product as opposed to a number of firms.

This means that the maximum efficiency is realised only if single supplier exists. This occurs because of the over whelming production cost advantage of the firm, mostly the first to have entered the industry over the competition. This is usually the case for business which requires huge initial investments.

This can also be a case where in a particular firm owns the source for the raw materials required for the production of a particular product. Natural monopoly also results when a particular firm is large enough to cater to the entire market.

The Fundamentals on which the Monopolies operate remain more or less the same, Independent of the type and the sector in which they operate.

The Characteristics of Monopoly could be described as follows:

Single Seller: This means that there is only one firm producing all the output for a particular product. The firm is identical to the industry.

Market Control: The monopolist firm owns a very large chunk of the total market value. This gives it the ability to set its own price. Although a monopolist’s market value is high, it is not absolute in nature.

High Barriers to Entry: A monopolist derives its power from the barriers to entry for competition. What this means is that it creates circumstances that limit the scope of competition or completely eliminate it.

The major Barriers to Entry could be summarised as economic, legal and deliberate.

Economic barriers: These include Economies of Scale, Capital and Technological edge.

Economies of Scale: This could be defined as the declining cost over large range of production. This factor plays a very vital role for a Monopolist to hold its position. Monopolies are therefore in a position to cut prices lower than a new entrant’s production cost, driving them out of the industry.

Capital: Production that requires huge capital investment or very high degree of Research and development make it very difficult for small firms to enter, or compete.

Technological Edge: Monopolies are generally able to utilize the latest technological advancements to the fullest, decreasing production costs, and it might not be feasible for a small firm to use the latest production technique because of the capital involved or because of its very limited and small market share.

Legal Barriers: These rights provide the opportunity to monopolise the market, restricting competition. Copyrights and patents give the owner exclusive rights to produce and market a particular product.

Deliberate Barriers: Firms aiming to monopolise a market may engage in some deliberate effort to eliminate competition. These may be legal or illegal, firms may try to influence the political decisions to maximise profits and gain market value.

Perfect Competitive Market:

A perfect competitive market can be described as a market in which, products developed by a firm can be easily substituted with the products developed by other firms. Each supplier must set its price equal or very close to what its competitors have set. If it fails to do so, it will loose its customers to other firms. There are large numbers of companies producing same or almost identical products, catering to many customers. The firms cannot set prices any lower than each other because the profit margin already is very thin.

This “Equilibrium price” is very close to the production cost.

The Basic Characteristics of a Perfect Competitive Market could be described as follows:

Market Control: Firms under such markets have zero market control.

Number of Competitors: Infinite number of competitors.

Barriers to Entry: Zero barriers to entry. Any firm can enter and exit at any point of time.

Advantages:

The above points indicate that a “Perfect Competitive Market” ensures that the selling price is not a factor for competitions. This is very beneficial from a customer’s point of view.

This ensures that there is a constant research and development process undertaken to gain even the slightest edge.

There are high standards for customer satisfaction.

Disadvantage:

Each individual firm caters to only a small percent of the overall customers and the overall market value. Meaning, that there is a limited scale of production, thus, the production prices for each of these firms remain high as compared to a single firm producing for a large a chunk of market share.

Benefits of Monopoly/ Advantages of Monopoly:

Research and Development: Higher profit gains can be used to fund expensive research and development to improve the production techniques and lower the cost of production in the future.

Economies of Scale: Increase in the production output leads to lowering the production cost.

Efficient use of resources.

A monopoly could also be a sign of the firm’s competitiveness, through its efficiency and dynamic approach.

Natural monopolies are far more beneficial for achieving lower cost of producing as opposed to Perfect competitive market condition.

Why Monopoly could be harmful/ Disadvantages:

A monopolist has the ability to charge differently to different types of customers to reap maximum profits. This can be achieved by classifying its customers according to their income, age, location etc.

Monopolists produce limited product output as they are limited by the Demand Curve, and charge substantially higher as compared to what would happen if the same firm operated under “perfect competition”.

Lower quality of products.

Low standard of customer satisfaction, providing limited or no after sales services.

Slow technological advancement, as the motivation is lost or very limited.

Monopolists could engage themselves in predatory pricing, using its monopoly for one product to increase monopoly of other products.

Large monopolies possess the ability to influence the political decisions to help them hold on to their position and gain maximum profits.

Exploitation or labour and restricted choice for the customer.

Mergers:

Merger is an aspect of corporate strategy and management which enables a particular company to grow rapidly by buying or selling a particular firm without having to create a separate business unit. Two business units typically of the same size come together and work as one entity. The motive could be anything, form increasing stock value or dominating a large share of the market. Supposing two fairly large companies of a particular sector merge, this combines their share of their individual market holdings. These firms now can be capable of producing a large output and due to Economies of scale reduce the production costs. They can actually charge lower than the market value of the product, eliminating the competition.

Mergers can result in a monopoly of the merged company.

Advantages of Merger:

Increase in the market share of the merged company.

Lower costs of production as a result of higher economies of scale.

Higher degree of competitiveness.

Increased financial aid.

Higher profitability.

Exchange of Technological know how within the merged companies and of Copyrights and patents.

Disadvantages of Merger:

Legal costs as a result of merger.

Capital involved in a takeover.

Short term losses as a result of changed management and the time required to establish a new management.

Some mergers may result in the performance decline of that company and might affect the consumers.

If a merger fails, the share price of the company drops, resulting in investor or share holder discomfort.

Mergers might result in monopoly, causing consumer discomfort.

Public Policies:

Public policies taken into consideration or formulated with regards to monopolies should be based on what is the most beneficial to the economy as a whole.

When it comes to dealing with Natural Monopoly, it should be for most part left alone with a few degrees of government regulation.

For monopolies which are not natural, regulation should take place bearing in mind the monopolist’s behaviour. If the monopoly is operating under a benevolent management or the prices for its products remain unchanged and under certain marginal level, it should be left alone for most part. On the other hand, if a monopolist is known to change its prices and indulge in underhanded tactics, strict regulation should be encouraged.

Government should also take into consideration the cost involved in breaking a monopoly.

The ways in which Government can reduce the ill effects of a monopoly is summarised as follows:

Strengthening existing competition by providing required funds at cheaper rate of interest and setting up financial aids.

Regulating existing monopolies by keeping a tap on price discrimination, setting up standards of productions, which should be met compulsorily.

Regulating a monopolist’s involvement with political activities.

Having resources required to break a monopoly if needed.

Monitoring the regulatory practices.


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